ENTRIES TAGGED "funding"

Investors and publishers can benefit from a pool of innovation.

Last June, over beer (generally a good place to start), I had a great conversation with entrepreneur Hugh McGuire about how startups are funded in publishing. There was a lot to discuss, a little to celebrate, a bit to complain about, and one fact that we arrived at beyond everything else. It’s a challenge to raise money for publishing ventures.

Sure, raising funding is always difficult, but publishing presents a particular challenge. Publishing is “old media,” and it’s new to the technology game (especially in terms of startups focused on the consumer web). There isn’t a real precedent of cooperation between technology and publishing. And that makes it a challenge to find money to build new things.

Roadblocks

Some of the issues come straight out of the investor community:

Most investors are unfamiliar with publishing. Books seem traditional. I can’t tell you how many investors put their personal feelings into the equation and say things like, “Well, my spouse is in a book club, but I don’t read much so I’m probably not a good fit.” Ouch. Although personal experience figures in somewhat, their total unfamiliarity with the market stops them cold before we’ve even started.

Concerns about returns on investment. It’s true, we haven’t seen the huge acquisitions like Instagram. Or Yammer. Yet. Publishing is worth billions – it has what everyone wants: content. So maybe the book industry doesn’t seem like a high growth market. One thing is certain, though, as the industry goes digital, those publishing billions are going to be spent on something. Clear exits will materialize.

There’s always the What-If-Google-Does-It argument. To be fair, every startup gets the Google, Amazon, Apple question, which goes something like “What will you do if (all together now), Amazon, Apple, or Google does it?” A few weeks ago I heard Henrik Werdelin of Prehype give a presentation at a TOC event about innovation and he chuckled about this specific question. He pointed out that at this point Google can pretty much build anything anyone can invent. That shouldn’t be your yardstick. The better question is, are the founders smart enough to offer good strategy, a unique experience, or a new market? If so, Google is much more likely to buy the company once the idea proves out, rather than build every single idea in the world. In short, that question is not a question.

True, there are some people who get investment while working on publishing startups. The list above can be overcome if you’ve worked with those investors before. Or if you’re an Ivy-League ex-Googler that has had a successful exit, you have qualifications that will work in your favor. But that is a frightfully small portion of the people with boots on the ground, developing cool ideas. What about the technically savvy people who don’t meet those criteria (most of the people I know innovating in publishing today)? If they’re starting up in Amercia, those people go out and crash head-first into the arguments listed above, then spend a few years toiling in bootstrapped obscurity.

People have been thinking about this for awhile

Last October Brian O’Leary gave a stirring talk, “The Opportunity in Abundance,” at the Internet Archive’s Books in Browsers conference (transcribed here). He put forth a bold vision of collaboration among publishers, each contributing to support innovation and enjoy in its technical fruits. He talked about goals – that survival for publishing is not a “goal” in itself, for example – and that innovation is one of the important pillars of publishing health. He used an example from the gas industry to illustrate how it pooled resources to innovate. He said:

I called the prospect of people not engaging with our content the publishing manifestation of a super-threat. I’d argue (pretty strongly) that it represents a super-threat not just to publishing, but to the way we function as a country, an economy and as a part of a world order. We have a responsibility to address this threat, not just so that we can make money, but because we’re the ones with the ability to solve it.

Other industries facing an uncertain future have banded together to form and fund superstructures. The Gas Research Institute, for example, was authorized in 1976, at a time when the natural gas industry was highly fragmented among producers, wholesalers and distributors. The latter often held a local monopoly.

By 1981, GRI was spending $68.5 million on research and a total of $80.5 million on oversight and R&D. This represented about 0.2% of the wellhead price of gas that year, valued at the time at a bit more than $38 billion.

GRI undertook research and development in four areas…Funding, drawn from a surcharge on sales as well as some government grants, accelerated to something north of $100 million in the mid-1980s.

If you look across all of publishing in the United States, it’s about a $40 billion business. Imagine what we could do if we could create and sustain an organization with $80 million a year in funding. It’s also likely that an industry-wide commitment to addressing engagement would garner the external funding that most parties have been understandably reluctant to spend on narrower causes.

A good point. A great plan. If CourseSmart and Bookish show us that publishers can partner, then why not partner in innovation? Brian gives a number of concrete suggestions for areas to focus on. I’ve been mulling this over ever since he gave this presentation. Despite his guidelines and recommendations, it hasn’t happened yet. But there’s a way this idea fits neatly into startupland.

The publishing incubator

A similar solution already exists in the tech world: the incubator. If you’re not familiar with it, technology incubators accept applications from startups in small batches. If accepted, the startup gets between $20,000 – $100,000 (in exchange for around 5% equity), along with three months of office space, mentors, a chance to demo for investors, and a lot of help. Investors get early access to cutting-edge technology. Corporations are encouraged to come in and meet the startups at any point along the way.

Many incubators are industry-specific. For example, there are four healthcare incubators in NYC alone, churning out fresh startups and new technology multiple times a year. Imagine the amount of healthcare innovation going on right now. Education does this too. Incubator ImagineK12 is one of many education-focused incubators from across the country – with a group of startups that has raised $10M post-graduation. And Turner Broadcasting just launched an incubator in NYC called Media Camp. Since the products integrate with broadcast media, there is a major focus on mentorship from executives in the field, and a lot of discussion about how to work with big media conglomerates. Sounds a lot like what we need in publishing. Even publishing expert Craig Mod recently wrote about how he is struggling with how to distribute his TechFellow money to startups.

Granted, there is some remarkable internal R&D: NYTimes Labs and The Washington Post Labs are doing good things. Those are commendable efforts. But those teams are usually small, and since they’re internal they don’t have the massive variation we see in incubators. One company isn’t going to move the needle for an entire industry in that way.

We need an incubator for publishing technology. We need a group of investors and publishers that want to benefit from a pool of innovation, and encourage it grow. With this, publishers would contribute to and sponsor events, perhaps even influence the direction of future partners. Investors would raise the fund, and choose the most viable startups. Innovation and disruption might actually find a common ground, as new technologies could drive reading adoption which drive sales (an argument technology writer Paul Carr has made before). We need to bridge publishing and technology, and this gets us there.

This should exist now. I’ve been working on publishing startups for five years and I have yet to see it. Moreover, with so many publishers on the East Coast, New York City is the place to do it. New York has a healthy startup industry, access to publishers and publishing conferences, mentors and experts. My question is, who’s going to do something about it? Who’s with me?

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